Add interest rates and fuel shortages to the list of issues airline CEOs have to worry about.
Airline stocks fell faster than the broader markets on an ugly day of trading, weighed down by fears that two significant expenses for the industry could soon shoot higher. Shares of American Airlines Group (NASDAQ:AAL), United Airlines Holdings (NASDAQ:UAL), and Spirit Airlines (NYSE:SAVE) led the way with 5% declines, and shares of Delta Air Lines (NYSE:DAL), Southwest Airlines (NYSE:LUV), and JetBlue Airways (NASDAQ:JBLU) were all down 4% or more.
Airline stocks after a miserable 2020 have enjoyed a rebound in 2021, fueled by hope that as the pandemic fades demand for travel will return. There are some initial signs that this will be a busy summer for travel, but on Tuesday airline investors got a reminder that we are still in the early days of a recovery.
Wall Street was in the red on fears that inflation might be creeping in, with a Bank of America report saying that mentions of inflation increased 800% from a year ago on quarterly earnings calls and reports.
Inflation could lead to the Federal Reserve raising rates faster than expected, which would be bad news for airline balance sheets. The U.S. industry raised more than $50 billion last year to survive the pandemic, with much of that total coming in the form of new borrowings. Higher rates could add significantly to interest expense, which could crimp a recovery, or make it harder for the airlines to continue to borrow.
Fuel could also soon be getting more expensive. A cyberattack has caused the temporary shutdown of the Colonial Pipeline, which carries about half of the fuel consumed along the U.S. East Coast.
American said Tuesday it was adding a fuel stop to flights between Charlotte and both Honolulu and London to try to make sure they have enough supply. If supply and demand are unbalanced, rising jet fuel prices, even if temporary, could cut into results this quarter.
The long-term trajectory for airlines is solid and more secure now than it has been for a long time. However, the near term contains a lot of uncertainty, even without these added concerns weighing on investors today. Meanwhile, in some cases, the stocks now trade higher than they did prior to the pandemic.
For those looking to buy in now and ride out the turbulence, Delta and Southwest look like the most attractive long-term options. But given the risks and the likely slow recovery up ahead, it is a good time to be cautious about airline stocks.